11/16/98 COMMENTARY: NAILING MICROSOFT MEANS PROVING HARM WAS DONE

COMMENTARY: NAILING MICROSOFT MEANS PROVING HARM WAS DONE

In a videotaped deposition played in a Washington (D.C.) courtroom on Nov. 2, Microsoft (MSFT) Chief Executive William H. Gates III slouched in his chair and often claimed not to know about subjects on which he had penned entire memos. This was a very uncomfortable day for Microsoft, and there seems little question that the Justice Dept. scored big in its historic antitrust case that charges the software giant with using its operating-system dominance to strongarm companies into distributing its Internet browser. The Gates performance was all the more compelling because it followed three government witnesses who offered powerful tales of nasty tactics. But will showing that Microsoft is a big, bad bully and that Gates is bully-in-chief be enough for the government to win?
Not quite. Proving predatory behavior will be only half the battle. According to many antitrust attorneys, the government also will have to show such conduct actually hurt consumers by stifling meaningful competition and innovation--not an easy task. ''Where is the effect on the ultimate consumer?'' says New York antitrust attorney Robert A. McTamaney. ''No one is representing the constituency that the law is supposed to affect.''
''USER LOYALTY.'' That's the point Microsoft attorney John L. Warden repeatedly made during cross-examination of executives from Netscape Communications Corp. (NSCP) and America Online Inc. (AOL). Warden argued that while Netscape, Microsoft's chief browser rival, may be losing market clout, its 40% share means it's alive and well--and able to offer consumers a strong product to compete with Microsoft's.
Warden bolstered his argument in the trial by introducing an internal Netscape document that showed its users rose from 40 million to 65 million in 1997. The paper, written by a Netscape employee, noted ''strong user loyalty'' to its browser. When shown this exhibit, Netscape Chief Executive Officer James L. Barksdale groused: ''I think this young person is getting carried away.''
And while the government claims that Microsoft's contracts cut off key distribution channels for Netscape, Warden said consumers could easily find Netscape's product by downloading it from the Internet or getting it free from the company. ''The absence of substantial foreclosure is extremely important,'' Warden said. ''It is fatal to...every one of the claims asserted in the complaints.''
Warden also made inroads on the pricing issue. He argued that consumers benefit from having more functions packed into the Windows operating system at no increase in cost. Says Carl B. Shapiro, economics professor at the University of California at Berkeley: ''Consumer harm is tangible when you can show jacked-up prices. It is hardeR to prove in this case. If you set the bar as, 'Can Justice show consumer harm in the here and now?,' that is very difficult.''
Of course, it's not as clear-cut as that. Antitrust law, which is based mainly on ever-changing court decisions, is murky enough that lawyers disagree over exactly how much harm must be proved. Or for that matter, whether the damage to consumers must have already occurred.
THREAT TO CONSUMERS. Some, like F.M. Scherer, an economist and professor of corporate policy at Harvard University's John F. Kennedy School of Government, argue that while Microsoft may not yet have injured consumers, the company's practices do present a long-term threat. ''The real issue is not last year's harm to consumers,'' says Scherer. ''The issue is one of long-run harm.''
But proving a hypothetical may pose just as great a challenge for Justice. The government hopes to make its case on future harm when two economists testify on the idiosyncrasies of the high-tech industry. They will argue that the demise of Netscape's browser business is inevitable. For one thing, the government argues, with Microsoft's Internet Explorer bundled into the operating system, computer makers have little incentive to offer alternatives--and consumershave little reason to bother downloading Netscape. ''Most people take the path of least resistance,'' says Lou Mazzeucchelli, a technology analyst with Gerard Klauer Mattison & Co. in New York. ''Is it too late to level the playing field? I like to hope not.''
The economists may argue that while Microsoft prices may be dropping, they're not dropping as fast as those on software products made by some other companies--and certainly display nothing like the deflation affecting computer hardware. Netscape can't sustain free browsers forever. Once browser competition disappears, the argument goes, Microsoft can extend its control over Internet commerce--a scenario in which a single company may have too much power for the public good.
''A LITTLE RISKY.'' For now, though, these are all ifs. William E. Kovacic, visiting antitrust professor at George Washington University, says Justice may have erred when it pulled a Boeing Co. (BA) executive from its witness list. ''It's a little risky to tell the court that you can infer from the brutishness of conduct that there was anticompetitive effect,'' Kovacic says. ''It's much more effective to have the users step into court and say, 'We suffered.'''
Testimony from one of Justice's own witnesses shows just how hard it will be to prove harm. During Warden's cross-examination of David M. Colburn, AOL's senior vice-president for business development, Warden asked if Microsoft's ''decision to develop improved versions'' of browser technologies had been bad for AOL subscribers. ''No,'' Colburn replied. Warden then asked, ''Has Microsoft's decision to make Internet Explorer available to AOL free of charge been bad for AOL subscribers?'' Again, ''No.''
That's not a winning admission for prosecutors. With its case still young, Justice has time to try to prove Part II. If it doesn't, all the evidence showing bare-knuckled tactics might hurt Microsoft in the marketplace, by emboldening competitors and alienating consumers, but not necessarily in court.
By Susan Garland
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